Recap
• Borrowing powers of a company
• Modes of borrowing
– Short term borrowing
– Long Term borrowing
• Restrictions on Borrowing
• Ultra Vires Borrowing
– Borrowing Ultra Vires the company
– Borrowing Ultra Vires the Director
DEBENTURE
Debentures
• Debenture is a document issued by the company as
an evidence of its debt.
• It is a security issued to the investors under the seal
of the company.
• It contains a contract for the repayment of debt and
the interest thereon at a specified rate.
Debentures
Companies Ordinance Defines it as [Section
2(1)(12)]:
• “Debenture” includes debenture stocks, bonds, Term
Finance Certificate and any other securities, other
than a share of a company whether consisting a
charge on the assets of the company or not.
• Thus debenture means any security (excluding the
shares) issued by the company against amount
received by it as loan.
• Such securities may or may not constitute a charge
against the assets of the company.
Features of Debentures
• Debenture is a type of debt instrument issued to
anyone who lend money to a company for a specified
term and interest rate. In general, debentures have
the following important features:
1) Debenture holders are not the owners of the
company. They are considered the creditors of the
corporation or in other words, the company borrow
money from them through issuing debenture.
2) No voting rights. The debenture-holder is not a
shareholder and cannot vote in the company's
general meetings.
Features of Debentures
3) Fixed rate of interest. A debenture with a
fixed charge has a fixed rate of interest. It can
be presented as "10% Debenture". They are
always unsecured and earns a fixed rate of
interest but has no share of the profit.
4) Compulsory payment of interest. The interest
on debenture is payable irrespective of whether
there are profits made or not.
Advantages and Disadvantages of
Debentures
The Advantages of Debentures are as follows:
1) The holders of the debentures are entitled to a
fixed rate of interest.
2) Debentures are for those who want a safe and
secure income as they are guaranteed payments with
high interest rates.
3) They have priority over other unsecured creditors
when it comes to debt repayment.
The Disadvantages of Debentures
• The Disadvantages of Debentures are:
1) Unlike ordinary shares, debenture holders are not
considered the owners of the company. They are
long term loan capital and holders will have no right
to vote at the annual general meeting.
2) Debentures are more secure than stocks, but will
lead to a lower rate of theoretical return.
3) It is a type of debt instrument which is not secured
by collateral (or physical asset). In case of
bankruptcy, the bond holders are given priority over
the debenture holders
Difference between Debenture and
bond
Debenture and bonds are similar except for one differencebonds are more secure than debentures. A debenture is an
unsecured loan you offer to a company. The company does
not give any collateral for the debenture but pays a higher
rate of interest to its creditors and bondholders are paid
low interest. In case of bankruptcy or financial
difficulties, the debenture holders are paid later than
bondholders.
In general terms bondholders are secured by access to the
underlying asset in case of default by the issuer.
Debentures, on the other hand, are unsecured, and
debenture holders do not have recourse to assets in the
case of default by the debenture issuer
Kinds of Debentures
Ordinary Debentures
The debentures which are issued without any
security for repayment are called ordinary
debentures.
Redeemable debentures
The debentures which are repayable either
at a particular time or on the happening or non
happening of an event or after an indefinite period
are known as redeemable debentures.
These are the Debentures which have to be repaid within
a certain specified period. Eg: 5% 2 years Rs. 1000
debenture means redeemable. period is 2
years(5%:interest/coupon payment). After redemption,
they can be reissued.
Secured/Mortgage Debentures:
• Debentures secured against assets of the company .i.e. if the
company is winding up, assets will be sold and debenture
holders will be paid back. The charge/mortgage may be fixed
or a floating charge. If it is fixed, charge is on a specific asset
say plant, machinery etc. If it is floating charge, it means it is
on general assets of the company.
• Which assets are charged: The ones available with the
company presently and also assets in future
• Mortgage deed: Includes nature/value of the security, date of
interest payment, and rate of interest, repayment terms, and
rights of the debenture holders if the company defaults. In the
event of default of company to pay interest or principal
installment, they can recover their money via the assets
mortgaged.
Kinds of Debentures
Bearer Debentures
The debentures which don not specify the name
of the owner are called bearer debentures. Any
holder of such debenture is entitled to receive
interest on due dates.
• These can be transferred by mere delivery.
• Company does not hold records for the debenture
holder.
• Interest will be paid to the one who displays the
interest coupon attached to the debenture.
Irredeemable Debentures
• Irredeemable Debentures
The debenture which are not payable during the life
time of the company which is issued.
• Irredeemable Debenture is a very common concept in
investments.
• Irredeemable Debenture is a bond which is issued by the
Government which does not have a date for expiring or
maturity.
– To be more specific, Irredeemable Debenture gives interest but
will not be able to redeem at the face value. Irredeemable
Debenture is payable when the company will be closed or at the
time of winding up of the company.
– Irredeemable Debenture benefit is that, in this kind of
debentures money will be held safe with the government and
the full amount will be repaid back.
Characteristics of irredeemable
Debentures
1. Irredeemable Debentures must be in
written format. An oral contract cannot be
called as an irredeemable debenture.
2. Irredeemable debentures can act as an
acknowledgment of indebtedness.
3. An irredeemable debenture signed by two
directors .
Characteristics of irredeemable
Debentures
4. Irredeemable Debentures are usually issued
in series. Single debentures are also issued in
rare cases.
5. A business organization also can issue
irredeemable debentures without any
undertaking to repay.
6. Irredeemable debentures will be paid after
the company tenure.
Kinds of Debentures
Convertible debentures:
Debentures which are convertible into shares of
the company are called Convertible debentures.
Debentures which can be converted to either
equity shares or preference shares by the
company or debenture holders at a specified
rate after a certain period.
A company can also issue Partly Convertible
Debentures whereby only a part of the amount
can be converted to equity/preference shares..
Kinds of Debentures
Perpetual debentures:
These are the debentures which are not cancelled on
redemption and can be re-issued at time after their
redemption.
• A bond with no maturity date.
• Perpetual bonds are not redeemable but pay a steady stream
of interest forever.
– Some of the only notable perpetual bonds in existence are
those that were issued by the British Treasury to pay off
smaller issues used to finance the Napoleonic Wars (1814).
– Some in the U.S. believe it would be more efficient for the
government to issue perpetual bonds, which may help it
avoid the refinancing costs associated with bond issues
that have maturity dates.
Provisions regarding Debentures
a) The debenture-holders and shareholders have the
right to receive a copy of any trust-deed for securing
any issue of debentures at their request on payment
of a prescribed fee; (Section-113)
b) No debenture, other than a convertible debenture
shall carry voting right; Rights of convertible
debentures shall not be in excess of rights of ordinary
shares of equal paid-up value; (Section-114)
c) A decree may enforce a contract with a company to
take up and pay any debentures of the company;
(Section-117)
Power to Re-issue Redeemed
Debenture Sec 116
• Where a company has redeemed any debentures
previously issued, the company( unless the articles or
the conditions of issue expressly otherwise provide)
shall have power, to keep the debentures alive for the
purposes of reissue,
• and where a company has purported to exercise such
a power the company shall have power to reissue the
debentures either by reissuing the same debentures or
by issuing other debentures in their place, and upon
such reissue the person entitled to the debentures
shall have, and shall be deemed always to have had,
the same rights and priorities as if the debentures had
not previously been issued.
Re-issue of redeemed debentures
Power to re-issue redeemed debentures in
certain cases [Section 116]
1. Where with the object of keeping debentures alive for
the purposes of reissue they have been transferred to
a nominee of the company, a transfer from that
nominee shall be deemed to be a reissue.
Re-issue of redeemed debentures
• Where a company has deposited any of its
debentures to secure advances from time to time on
current account. The debentures shall not be
deemed to have been redeemed by reason only of
the account of the company having ceased to be in
debit while the debentures remained so deposited.
• The re-issue of a debenture or the issued of another
debenture in its place shall be treated as the issue of
a new debentures for the purpose of stamp-duty and
registration.
Register of Debentures Holders
Section 149 provides that every company shall keep a
register of debenture holders and enter therein the following
particulars namely:
• Names and addresses and description of each debenture
holder.
• Debentures held by each debenture holder.
• Distinctive numbers of debentures held by each debenture
holder.
• Date at which any person ceased be a debenture holder.
• The amount of the debenture to be considered as paid by
each holder.
• The total number of the debenture bonds or certificates.
Register of Debentures Holders
• The register also contains a record of
– the debentures transferred by a holder and
– the balance held by him after the transfer.
• The company is also required to maintain an index of the
names of the debentures holders,
– if their number exceeds fifty, unless the register of debenture
holders is self indexed.
– Any alteration made in the register of debenture holders must
also be entered in the index within 14 days from the date of such
alteration.
Trust, Trust Deed and Trustees
• Whenever debentures are issued by the company to
ensure security of repayment the company forms a
trust and appoints trustees under trust deed.
• The purpose and functioning of the trust is stated in
the trust deed.
• The trustees are responsible for safeguarding the rights
of debenture holders and mortgage deed is entered
into between the company and trustees.
• Certain powers and liabilities of the trustees are stated
in Section-119 of the ordinance.
Power/Rights of Trustees
The trustee can sue the company for all redemption
monies ad interest in the following cases:
• Where the issuer of the debentures as mortgager
binds himself to pay the debenture loan and accrued
interest thereon, he can be sued on the date if the
amount remains unpaid.
• Where trustees are deprived of all or part of security
because of wrongful act of the issuer.
Power/Rights of Trustees
• Where the mortgaged property has become
insufficient due to reasons other than wrongful act
or default of the issuer, and security is not made up
despite the provision of reasonable opportunity by
the trustees.
• Where the trustee is entitled to take possession of
the mortgaged property and that possession is not
delivered to him by the issuer or any other person
claiming the title of that property.
Power/Rights of Trustees
• If the trust deed so provides, the trustees can sell the
mortgaged property or assets of the company
without suing it.
• The trustees cannot be indemnified against any
liability for breach of trust due to lack of care and
negligence as a trustee. Any such indemnification in
the trust deed would be void.
Issue of Securities and Redeemable Capital not based on
Interest[Secton-120]
• A company may by public offer or upon terms and
conditions contained in an agreement in writing
issue redeemable capital in any or several forms to
one or more scheduled banks, financial institutions
or persons specified by the Federal Government for
this purpose.
• Such capital may be issued either through public
issue or upon terms and conditions contained in an
agreement in writing.
Issue of Securities and Redeemable Capital not based on
Interest[Secton-120]
Such capital may be issued in consideration of any
funds, moneys or accommodation received or to be
received by the company, whether in cash or specie or
against any promise or guarantee, undertaking or
indemnity issued to or in favour of or for the benefit of
the company.
[Secton-120]
The agreement should provide the following
a) Mode and basis of repayment of redeemable
capital within a certain period of time.
b) Arrangement for sharing of profit or loss.
c) Creation of special reserve called the
“participation reserve” by the company in the
manner provided in the agreement.
Issue of Securities and Redeemable Capital not based on
Interest[Secton-120]
• The terms and conditions for the issue of certificate
of redeemable capital and the rights of their holders
shall not be challenged or questioned by the
companies or any of its shareholders.
• The provisions of the Companies Ordinance relating
to creation, issue, increase or decrease of the capital
shall not apply to the redeemable capital.